Week 3 – The auditor at risk video Handout 1 – Background to South Bay Systems Ltd South Bay Systems Ltd manufactures integrated hardware and software chemical analysis products for the medical and drugs industries. The company is owned and run by Tim Falco, recognised throughout the industry as being one of the most innovative hardware engineers in his field. He has already built up one very successful business in a similar market that he sold to a major competitor 5 years ago. Tim Falco established South Bay Systems Ltd after the sale of his previous business.
The company has grown rapidly since that time. The early products were very successful and quickly established South Bay Systems as one of the major players in the industry. The company has worked hard to keep that early momentum going and continues to spend considerable amounts on research and development. The company has a high public profile and Tim frequently appears on television, explaining the company’s latest innovations. During recent times, the company has found it more difficult to keep ahead of its competitors.
At the time of the audit, the company was confident of gaining a major contract. The potential customer, Cosmonet, is a major medical equipment retailer in the UK and Europe. During the audit, negotiations were still in progress, but Tim Falco seemed certain that South Bay Systems would get the contract. Company personnel and systems Tim Falco is the managing director and sole shareholder. Although the company has been established for 5 years, Tim retains his hands-on approach to all areas of the company and hence gets closely involved in the accounting function.
The company only has one qualified accountant, Fernando Clarke, who has an AAT trainee to help him. The company uses SAGE for its accounting system, together with a stock recording system written by Tim Falco and one of his software engineers. Audit personnel The audit is carried out by a firm of Chartered Accountants, Roberts & Jones. The firm has been heavily involved in the company since starting to act as auditors just after the formation of the company.
The firm initially audited the company and maintained the accounting records, prepared management accounts, cash flow projections and budget forecasts and assisted in raising finance. However, the degree of involvement has lessened now that the company employs its own accountant. The firm uses a proprietorial audit system adapted for its own requirements. All staff are trained to use this system. The firm’s procedures require a second partner review or other external consultation for high risk assignments.
The engagement partner is Peter Manton, who has dealt with the company from the beginning. He is an audit partner, responsible for many of the firm’s largest audit clients. Consequently he is often under time pressure. Although South Bay is one of his major clients, Peter was heavily reliant on his audit team to carry out the work on the last audit. The senior, Louise White, qualified two years ago and is highly regarded within the firm. She was responsible for the audit plan on South Bay Systems Ltd, which was approved by Peter.
She also carried out the more difficult areas of the balance sheet audit work. Handout 2 – The audit of South Bay Systems Ltd You are about to watch a video showing the audit of South Bay Systems Ltd. During the video, you should try to answer the following questions. What audit risks should have been identified by the audit team? What weaknesses can you see in the approach adopted by the audit team? Do you think the firm has a duty of care to Hemisphere Developments Inc? Prevention: how could the weaknesses have been prevented?
